4 ms·

Curious. Doesn't this open up the possibility of debt slavery of the entrepreneur, to the government ? If my stock in my biotech startup goes thru the roof an

Curious. Doesn't this open up the possibility of debt slavery of the entrepreneur, to the government ? If my stock in my biotech startup goes thru the roof and i get taxed X, i could perhaps sell some stock to cover. More likely, though, I will get into an installment plan with the IRS since the gains are so massive its going to be tough to sell so much stock without a discount, to pay the IRS off. Next year, FDA does not approve my device, and my stock tanks to near $0. Now even if i sold all my stock, I can't even pay back the IRS for my tax debt. I now have lost my company, but I have also incurred massive debt in the process. And if I am not mistaken, IRS debt is not dis-chargeable in bankruptcy. Am I reading this wrong ?

missedthecue 5y ago
You're not. There are a lot of good reasons why governments don't implement or keep unrealized capital gains taxes for long.
- whakim 5y ago
  This isn't true. There are lots of recorded instances of wealth taxes (e.g. France prior to the abolition of the ISF several years ago; many countries which levied temporary wealth taxes after WWII, etc.)
  - lokedhs 5y ago
    Sweden did the same. A lot of people suffered during the dot com bust because they were taxed on enormous unrealised profits that had completely disappeared by the time they had to pay them (because the stock had tanked)
    - WalterBright 5y ago
      That happened to a friend of mine in the US. He had a "taxable event" when his stock options vested. By the time the tax bill was due, his stock was worthless, and he went bankrupt. He lost his home and last I saw was living in an RV.
      - chii 5y ago
        That's a different situation. Stock options are the same as having a cash payment, which is then immediately used to purchase the stock. It's correct to tax stock options when they vest. > By the time the tax bill was due, his stock was worthless if you could not afford the tax bill with free cashflow, you need to sell to cover. Not selling means you're taking the tax debt owed, and gambling it on stocks. It sucks that your friend lost everything - often people who have vested stocks don't think about the consequences of what they're doing, and just go for the greediest (and most risky) option of holding and hoping.
        WalterBright 5y ago
        He did not realize that he would owe income taxes on the difference between the option price and the value of the stock the day he bought it. He thought the option price would be his basis and he'd owe capital gains when he sold the stock. That was the way things used to be, but Congress had changed the rules. Quite a few people have been caught unawares by that.
  - WalterBright 5y ago
    There are indeed. And those countries wound up repealing them because of the disastrous effects.
    - whakim 5y ago
      Most evidence suggests that wealth taxes levied in the past have indeed reduced inequality and have not led to the type of tax avoidance their detractors would suggest.
      - WalterBright 5y ago
        The WSJ points out: "Complexity is one reason European countries, including France, Germany and Sweden, abandoned broad-based wealth taxes. Many of the rich dodged wealth taxes by exploiting carve-outs or moving. The very rich will find ways to avoid confiscatory taxes, but bad tax policy distorts investment. Sweden abolished its wealth tax in 2007 following an exodus of capital and business tycoons. France repealed its net wealth tax in 2018, estimating that some 10,000 people with 35 billion euros worth of assets had left in the previous 15 years for tax reasons. The government was losing revenue from income taxes that the wealthy would have paid." https://www.wsj.com/articles/the-democrats-wealth-tax-mirage-billionaires-janet-yellen-kyrsten-sinema-joe-manchin-11635197950 https://www.wsj.com/articles/the-democrats-wealth-tax-mirage...
        whakim 5y ago
        Sure, some people will move their assets around in order to avoid wealth taxes (to which there are, of course, solutions). That being said, in France revenue from the wealth tax grew at more than twice the rate of GDP from 1990-2018. Which means that even though some people were avoiding the tax, and oversight was extremely lax, there's no evidence that it was being serially evaded. And this is in the context of the European Union, perhaps the most hostile environment to wealth taxes that you can imagine given the free flows of people and capital.
        WalterBright 5y ago
narrator 5y ago
The idea of this is that private control of companies by independent minded founders should not exist. Only large financial companies like Vanguard and Blackrock should own large stakes in public companies. The practical effect is not to raise more tax revenue, it's to seize control from founders and give it to the financial oligarchy by forcing them to sell. This is what happens in Russia, Eastern Europe, Saudi Arabia, and other corrupt oligarchies. When a business gets successful enough, the oligarchs of the countries show up and offer a deal that the person running the company can't refuse and force them to sell to the local oligarch gang at a bad price. If they wanted to raise more tax revenue, they could just raise the top marginal income tax rate up to 98% or raise capital gains tax rates and not totally screw up things by forcing the confiscation of companies from their founders.
- ethbr0 5y ago
  > If they wanted to raise more tax revenue, they could just raise the top marginal income tax rate up to 98% or raise capital gains tax rates > If tax revenue is too low, just raise the top tax brackets. (Sweeney) That was the original proposal [0]. Republicans and moderate Democrats shot it down. Part of me thinks this is the "crazy" option, to actually get motion on increasing top rates and capital gains. Complaints about those ideas shrink when this is the current alternative. [0] https://www.nytimes.com/2021/05/28/us/politics/tax-rising-on-rich-corporations.html https://www.nytimes.com/2021/05/28/us/politics/tax-rising-on...
- flurben 5y ago
  The goal of the legislation is to shift the tax burden towards high net worth individuals, and away from wage-earners. Raising cap gains rates and/or increasing top marginal income tax rates are not very effective ways to achieve this goal.
  - narrator 5y ago
    If you have high net worth that means you have control, not that you are necessarily living lavishly. If you want to pay for personal expenses and buy yachts and the usual kinds of things that socialist complain about, you need to take that out in income or through capital gains. Thus, they want to pay for everything by forcing founders to sell control to the country's financial oligarchs like Blackrock and Vanguard who already own large amounts of most public companies.
chii 5y ago
if you tax unrealized capital gains, it's only fair to return unrealized losses. so > stock tanks to near $0 means you get all your paid tax back.
- ethbr0 5y ago
  Which opens the government up to actually having to pay back substantial sums from the IRS, in the event of an equity downturn.
  - gruez 5y ago
    that's going to wreak havoc on finances during a recession. if the economy goes to shit, the government has to come up with money to stimulate the economy AND pay back all the capital gains taxes they collected during the boom times, all while tax revenues are down because businesses are imploding.
    - chii 5y ago
      which is why academic professionals such as Aswath Damodaran say that this law is a bit stupid, and poorly thought out - it appeals to popular mindset, but it would be ineffective at collecting new tax revenue, and at worst discourage entrepreneurship leading to long term damage. https://www.youtube.com/watch?v=lQddA58hZdQ https://www.youtube.com/watch?v=lQddA58hZdQ
    - dragonwriter 5y ago
      > that's going to wreak havoc on finances during a recession. No, among other reasons, because its not going to happen, just as it doesn't with the taxes on realized capital gains and losses, where losses can offset gains, and if there is excess a certain amount of regular income, and if there is still excess (or not enough taxable regular income to use the full offset) end up as carryforward losses that can be used as future-year losses, but don't result in negative liability on their own. > if the economy goes to shit, the government has to come up with money to stimulate the economy AND pay back all the capital gains taxes they collected during the boom times If they were to write the law so that unrealized capital losses resulted in tax refunds, that would be stimulus, not an extra thing on top or stimulus. It might not be optimally targeted stimulus, but that rarely happens, anyway.
hncurious 5y ago
Imagine if that was policy during the dotcom boom and bust.
flurben 5y ago
Yes, you're reading this wrong. Referring to tax obligations as "Slavery" is disconnected from reality, and pretty insulting to all the Americans for whom real, actual American slavery is still impactful.
- deleted 5y ago
  [deleted]
ncallaway 5y ago
> If my stock in my biotech startup goes thru the roof and i get taxed X, i could perhaps sell some stock to cover. You don't have to unless your company is publicly traded (or has shares readily tradable in a secondary market), and your personal shares in the company are worth in excess of $1B. > More likely, though, I will get into an installment plan with the IRS since the gains are so massive its going to be tough to sell so much stock without a discount, to pay the IRS off. No, you don't have to do that. The law allows you to carry-forward your first payment over 5 years. That's different from a payment plan, because if the stock goes to 0 in year 3, you no longer owe anything. So, I'd argue you are reading it incorrectly. Tim Sweeny gets a fair bit wrong, and I'd highly recommend starting with the actual legislative text (available here: https://www.finance.senate.gov/chairmans-news/wyden-unveils-billionaires-income-tax https://www.finance.senate.gov/chairmans-news/wyden-unveils-...) to get more details on the law.

missedthecue 5y ago

You're not. There are a lot of good reasons why governments don't implement or keep unrealized capital gains taxes for long.

whakim 5y ago
This isn't true. There are lots of recorded instances of wealth taxes (e.g. France prior to the abolition of the ISF several years ago; many countries which levied temporary wealth taxes after WWII, etc.)
- lokedhs 5y ago
  Sweden did the same. A lot of people suffered during the dot com bust because they were taxed on enormous unrealised profits that had completely disappeared by the time they had to pay them (because the stock had tanked)
  - WalterBright 5y ago
    That happened to a friend of mine in the US. He had a "taxable event" when his stock options vested. By the time the tax bill was due, his stock was worthless, and he went bankrupt. He lost his home and last I saw was living in an RV.
    - chii 5y ago
      That's a different situation. Stock options are the same as having a cash payment, which is then immediately used to purchase the stock. It's correct to tax stock options when they vest. > By the time the tax bill was due, his stock was worthless if you could not afford the tax bill with free cashflow, you need to sell to cover. Not selling means you're taking the tax debt owed, and gambling it on stocks. It sucks that your friend lost everything - often people who have vested stocks don't think about the consequences of what they're doing, and just go for the greediest (and most risky) option of holding and hoping.
      - WalterBright 5y ago
        He did not realize that he would owe income taxes on the difference between the option price and the value of the stock the day he bought it. He thought the option price would be his basis and he'd owe capital gains when he sold the stock. That was the way things used to be, but Congress had changed the rules. Quite a few people have been caught unawares by that.
- WalterBright 5y ago
  There are indeed. And those countries wound up repealing them because of the disastrous effects.
  - whakim 5y ago
    Most evidence suggests that wealth taxes levied in the past have indeed reduced inequality and have not led to the type of tax avoidance their detractors would suggest.
    - WalterBright 5y ago
      The WSJ points out: "Complexity is one reason European countries, including France, Germany and Sweden, abandoned broad-based wealth taxes. Many of the rich dodged wealth taxes by exploiting carve-outs or moving. The very rich will find ways to avoid confiscatory taxes, but bad tax policy distorts investment. Sweden abolished its wealth tax in 2007 following an exodus of capital and business tycoons. France repealed its net wealth tax in 2018, estimating that some 10,000 people with 35 billion euros worth of assets had left in the previous 15 years for tax reasons. The government was losing revenue from income taxes that the wealthy would have paid." https://www.wsj.com/articles/the-democrats-wealth-tax-mirage-billionaires-janet-yellen-kyrsten-sinema-joe-manchin-11635197950 https://www.wsj.com/articles/the-democrats-wealth-tax-mirage...
      - whakim 5y ago
        Sure, some people will move their assets around in order to avoid wealth taxes (to which there are, of course, solutions). That being said, in France revenue from the wealth tax grew at more than twice the rate of GDP from 1990-2018. Which means that even though some people were avoiding the tax, and oversight was extremely lax, there's no evidence that it was being serially evaded. And this is in the context of the European Union, perhaps the most hostile environment to wealth taxes that you can imagine given the free flows of people and capital.
        WalterBright 5y ago

narrator 5y ago

The idea of this is that private control of companies by independent minded founders should not exist. Only large financial companies like Vanguard and Blackrock should own large stakes in public companies. The practical effect is not to raise more tax revenue, it's to seize control from founders and give it to the financial oligarchy by forcing them to sell. This is what happens in Russia, Eastern Europe, Saudi Arabia, and other corrupt oligarchies. When a business gets successful enough, the oligarchs of the countries show up and offer a deal that the person running the company can't refuse and force them to sell to the local oligarch gang at a bad price. If they wanted to raise more tax revenue, they could just raise the top marginal income tax rate up to 98% or raise capital gains tax rates and not totally screw up things by forcing the confiscation of companies from their founders.

ethbr0 5y ago
> If they wanted to raise more tax revenue, they could just raise the top marginal income tax rate up to 98% or raise capital gains tax rates > If tax revenue is too low, just raise the top tax brackets. (Sweeney) That was the original proposal [0]. Republicans and moderate Democrats shot it down. Part of me thinks this is the "crazy" option, to actually get motion on increasing top rates and capital gains. Complaints about those ideas shrink when this is the current alternative. [0] https://www.nytimes.com/2021/05/28/us/politics/tax-rising-on-rich-corporations.html https://www.nytimes.com/2021/05/28/us/politics/tax-rising-on...
flurben 5y ago
The goal of the legislation is to shift the tax burden towards high net worth individuals, and away from wage-earners. Raising cap gains rates and/or increasing top marginal income tax rates are not very effective ways to achieve this goal.
- narrator 5y ago
  If you have high net worth that means you have control, not that you are necessarily living lavishly. If you want to pay for personal expenses and buy yachts and the usual kinds of things that socialist complain about, you need to take that out in income or through capital gains. Thus, they want to pay for everything by forcing founders to sell control to the country's financial oligarchs like Blackrock and Vanguard who already own large amounts of most public companies.

chii 5y ago

if you tax unrealized capital gains, it's only fair to return unrealized losses. so > stock tanks to near $0 means you get all your paid tax back.

ethbr0 5y ago
Which opens the government up to actually having to pay back substantial sums from the IRS, in the event of an equity downturn.
- gruez 5y ago
  that's going to wreak havoc on finances during a recession. if the economy goes to shit, the government has to come up with money to stimulate the economy AND pay back all the capital gains taxes they collected during the boom times, all while tax revenues are down because businesses are imploding.
  - chii 5y ago
    which is why academic professionals such as Aswath Damodaran say that this law is a bit stupid, and poorly thought out - it appeals to popular mindset, but it would be ineffective at collecting new tax revenue, and at worst discourage entrepreneurship leading to long term damage. https://www.youtube.com/watch?v=lQddA58hZdQ https://www.youtube.com/watch?v=lQddA58hZdQ
  - dragonwriter 5y ago
    > that's going to wreak havoc on finances during a recession. No, among other reasons, because its not going to happen, just as it doesn't with the taxes on realized capital gains and losses, where losses can offset gains, and if there is excess a certain amount of regular income, and if there is still excess (or not enough taxable regular income to use the full offset) end up as carryforward losses that can be used as future-year losses, but don't result in negative liability on their own. > if the economy goes to shit, the government has to come up with money to stimulate the economy AND pay back all the capital gains taxes they collected during the boom times If they were to write the law so that unrealized capital losses resulted in tax refunds, that would be stimulus, not an extra thing on top or stimulus. It might not be optimally targeted stimulus, but that rarely happens, anyway.

hncurious 5y ago

Imagine if that was policy during the dotcom boom and bust.

flurben 5y ago

Yes, you're reading this wrong. Referring to tax obligations as "Slavery" is disconnected from reality, and pretty insulting to all the Americans for whom real, actual American slavery is still impactful.

deleted 5y ago
[deleted]

ncallaway 5y ago

> If my stock in my biotech startup goes thru the roof and i get taxed X, i could perhaps sell some stock to cover. You don't have to unless your company is publicly traded (or has shares readily tradable in a secondary market), and your personal shares in the company are worth in excess of $1B. > More likely, though, I will get into an installment plan with the IRS since the gains are so massive its going to be tough to sell so much stock without a discount, to pay the IRS off. No, you don't have to do that. The law allows you to carry-forward your first payment over 5 years. That's different from a payment plan, because if the stock goes to 0 in year 3, you no longer owe anything. So, I'd argue you are reading it incorrectly. Tim Sweeny gets a fair bit wrong, and I'd highly recommend starting with the actual legislative text (available here: https://www.finance.senate.gov/chairmans-news/wyden-unveils-billionaires-income-tax https://www.finance.senate.gov/chairmans-news/wyden-unveils-...) to get more details on the law.